The Executive Board of the International Monetary Fund (IMF) today completed the first review of Sri Lanka's economic performance under a program supported by a 20-month Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 206.7 million (about US$329.4 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 413.4 million (about US$658.8 million).

The SBA was approved on July 24, 2009 (see Press Release No. 09/266) for an amount equivalent to SDR 1,653.6 million (about US$2,577.2 million) or 400 percent of Sri Lanka's quota.

The Executive Board also approved Sri Lanka’s request for a waiver of applicability for the end-September 2009 performance criteria on net domestic financing (NDF) of the central government from the banking system and the non-bank sector.

“Sri Lanka’ performance under the Stand-by Arrangement is encouraging. Recent economic developments have been stronger than expected, and the near-term outlook has improved. While the Fund-supported program had helped Sri Lanka avoid a balance of payments crisis, fundamental vulnerabilities remain to be addressed. Strict adherence to the program targets and steadfast implementation of the reform agenda will be essential.

“The policy of gradually loosening monetary conditions was successful in reversing earlier liquidity shortages. There is scope for a further cautious easing of monetary policy in view of low inflation, weak credit growth, and below-potential output. The approach to accumulating reserves remains appropriate, and reserves are currently at more comfortable levels. Fundamental external adjustment is still necessary, including through greater exchange rate flexibility.

“The authorities remain committed to a deficit reduction and planned fiscal reforms, particularly through expenditure restraint and tax reform aimed at broadening the tax base and simplifying the system. The interim budget aims to deflect spending pressures in the run-up to parliamentary elections. The authorities intend to submit to the new parliament a full-year budget for 2010 that is consistent with the program’s deficit targets and includes tax reform measures.

“The authorities have made good progress on financial sector reform, notably the amendment to the Banking Act to improve the bank resolution framework. While the rise in non-performing loans is a concern, banks maintain relatively healthy capital positions, mitigating the risk that this poses to the financial sector as a whole.

“Protecting the most vulnerable in society and addressing the urgent humanitarian needs of those adversely affected by the conflict remain key priorities. The authorities have recently stepped up the resettlement of internally displaced persons and expect to complete this process in early 2010. The post-war reconstruction needs will be met by diverting budget resources from military activities, as well as donor financing,” Mr. Kato said.